Gladstone Investment Corporation
Q2 2014 Earnings Call Transcript

Published: 29 Oct 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the Gladstone Investment Corporation's second quarter earnings call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. David Gladstone, Chairman. Please go ahead, sir.

[David Gladstone:]

All right. Thank you, Stephanie. Nice introduction and hello and good morning to all of you out there. This is David Gladstone and this is quarterly earnings conference call for shareholders and analysts of Gladstone Investment, common stock on NASDAQ GAIN. Again, thank you all for calling in. We love talking with our shareholders and some of the analysts and we like to give an update on our company, our portfolio and all of our business environment. I wish we could do this more often. We've been thinking about doing a mid quarter, but probably will not do that for a while. And now, I'd like us to hear from our General Counsel and Secretary, who is also the President of our administrator, Michael LiCalsi. He'll make a statement regarding forward-looking statements. Michael?

[Michael LiCalsi:]

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including those with regard to the future performance of the Company. And these forward-looking statements inherently involved certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and other similar expressions. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption "Risk Factors" in our 10-K filings and our registration statement as filed with the SEC, all of which can be found on our website at www.gladstoneinvestment.com, or the SEC's website, www.sec.gov. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. And please also note that these past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website, www.gladstoneinvestment,com, signup for our email notification service. You can also follow us on Facebook, keyword The Gladstone Companies, and on Twitter at gladstonecomps. The presentation today will be an overview, so we ask you to read our press release issued yesterday and also to review our form 10-Q for the September 2014 quarter-end filed yesterday with the SEC and you can access the press release and 10-Q on our website. And now, David Dullum, will come on with the President's report.

[David Dullum:]

Hey. Thanks, Mike, and good morning, to everyone. Generally, I'll like to briefly review what it is we do, in other words, what our long-term goals are just so we keep them focused that. And then as we go through near-term results. So, Gladstone Investment provides capital to buy other businesses. And these are generally with annual sales between $20 million to $100 million. We provide what is called subordinated debt and we do that in combination with equity in these companies and in some cases, it require to get a transaction closed we will also provide some of the senior debt. So this combination, really, of investment produces the mix and assets that Gladstone Investment is interested in doing because it really provides a basis of our strategy. And effectively what this means is that the debt portion of the investments provide the income, which will pay and help grow our monthly distributions, while we look to the equity portion of those investments to increase in value and provide a capital gains from time to time, which we've been able to actually demonstrate. We take – why are we different from ever BDC's and other finance companies sometimes we get asked, and the answer is basically that we take large equity positions in the companies that we purchase, and this differs from most other public PDC's that are predominantly debt-focused. So for instance the proportion of equity and debt for the investments in our portfolio is approximately 30% on the equity and roughly 70% on the debt. Most of the BDC's you'll find are closer to about 10% on equity and 90% on debt and some are even higher in regards to the debt side. So also we generally do not buy syndicated loans or portions of loans where there is no equity participation. And certainly we are very different from banks or finance companies that are only lenders. As far as difference per se versus other, say, private equity funds, most of those are generally 10-year type private partnerships that have a longer liquidity horizon, and we are different as a publicly-traded entity because our structure allows daily liquidity for our shareholders through the stock market. So it's important to keep in mind that we keep looking to the equity portion of our assets as the contributor to the overall value of our company, even though quarterly equity valuations of our portfolio could be volatile. So, for example – and I've mentioned this before, where we had a sale in actually August of last year which was our last actual sale of a portfolio company – in a company called Venue Solutions that we purchased with the original management team in late 2010, the original investment of roughly $6 million in equity generated cash proceeds of approximately $32 million, which resulted in a significant realized capital gain of around $25 million, and we also had dividend income along the way of about $1.4 million. That sale of Venue was the fourth exit from our management supported buyout investments since June of 2010. During this period, we also had those four liquidity events generated approximately $54.5 million in realized gains. So as I've mentioned before, the buyout market is currently [frothy], prices being paid for good companies continue to be quite steep, so while, say, selling a portfolio company in this market may appear to be tempting, it would really reduce our asset base and then we would, of course, be challenged with incrementally having to replace that investment in clearly what is a high purchase value environment and with other uncertainties like management teams, et cetera. So, while we are always looking for potential ways to generate a capital gain and continuing to evaluate that, we really have to be careful of just being willing to go out and sell a good quality company, you know, portfolio and having, as I mentioned, the issue with having to replace it. So with this continued growth in our operating income and the periodic realized gains that we have had, our Board was able to declare a distribution of $0.06 per share for months of October, November, and December, which is a run rate of $0.72 per share per annum. Additionally, our Board declared a one-time special distribution of $0.05 per share, which is payable in December. So this represents a third calendar year in a row that a one-time special cash distribution of common stockholders has been declared. So, what is on – from the deal origination standpoint, we are very proactive in deal generation. We have offices in New York, Los Angeles, Chicago, and of course in our headquarters outside of Washington, D.C. And so we have a very broad and deep geographic footprint. Primarily, we are calling on what we know as independent sponsors, middle market investment bankers and other sources that help to create what we think of as proprietary investment opportunities, in other words, what those that perhaps are not in a broadly auctioned type of a sale process. We generally do not depend on others to negotiate or structure our investments. And generally our investments do include, though, partnering with the management teams of those companies and occasionally, as I mentioned, independent sponsors or other folks that may originally find the opportunity and they need us to participate with them, bringing the capital to make the transaction work. So our strategy then of providing this financing package, including both the debt and the majority of the equity, is a competitive advantage as it gives the seller, who might be the independent sponsor if one is involved, the management team, for instance, a very high-degree of comfort that, if we get to the point of negotiating of value, that the purchase will take place at least from the ability of the financing perspective. And in addition from time to time, we might have an outright purchase where we find opportunities to partner with a business owner who will sell a portion of a company to us and use that capital to grow the business. So our focus for the sorts of things we look for, we generally are going to invest in companies with at least $3 million of consistent cash flow, operating cash flow. Some of the areas, industry areas, we look at are light specialty manufacturing. We've looked at specialty consumer type products and services. We are very much in favor of industrial type products and services, and we also have some exposure and continue to look to aerospace and broadly defined energy areas. So turning to the activity that we've had for the quarter which ended September 30, 2014, we invested $21.9 million, and this was the first of which in September, we purchased a company called Cambridge Sound Management, Inc., through a combined debt and equity investment of approximately $20.2 million. Cambridge Sound is based in Waltham, Massachusetts [indiscernible]. It's known as cell masking systems and solutions, very nice business, and very nice cash flow at the current time. In August, we also purchased a manufacturing plant and head office of one of our portfolio companies, and did essentially a sale and lease back on that transaction so it's a small dollar investment. And then subsequent to September 30 to the end of the quarter, we purchased a company called Old World Christmas, again, through a combined debt and equity investment of approximately $24.4 million. Old World is headquartered in Spokane, Washington. It is a designer and a distributor of an extensive collection of blown glass Christmas ornaments, tabletop figurines and vintage style light covers and nostalgic greeting cards that go into primarily the independent gift channel. So essentially right at quarter end and subsequent to quarter end, we had two very nice new acquisitions in our portfolio. Leading then into what sort of activity we have in our pipeline, of course, our goal, as we've mentioned, generally, is defined opportunities that fit our investment parameters, which generally means at least at two times cash and cash return for the equity portion of the investment and certainly a high yield on the debt portion of those investments to allow us to generate the combined cash income the drives our distributions. And as I mentioned again, this is a – this is a very challenging [bio] environment. It values – are quite high, quite steep but it's – we've demonstrated in our two new investments I just briefly talked about, we are able to keep adding for our asset base. And right now I'm, frankly, encouraged with the pipeline activity we see and some new investment prospects. However, we really need to keep our – really, our value proposition is important to us, so we have to stick to that. And to do that, we really need to keep expanding as we do our marketing efforts and continue to grow our presents in the marketplace. So the outlook and in summary the goal for the fund is to maximize distributions to shareholders with solid growth in both the equity of our investments and the income portion of our assets. So with that, I'll turn it over to David Watson, our CFO and Treasurer. David?

[David Watson:]

Thanks and good morning to everyone. Big news, this quarter, subsequent to it, is that we are able to get some new deals on the books totaling over $45 million and that we were able to increase our line of credit capacity 75% from $105 million, up to $185 million by adding four new banks. These actions have enabled us to expand our balance sheet. And at the end of the September quarter, we had $351 million in assets, consisting of $347 million in investments at fair value, with a cost basis of $412 million [up $3 million] and $11 million in other assets. At our cost basis, 72% of our portfolio assets consist of debt investments of approximately $299 million, and 28% of $113 million consisted of equity securities, which we hope will produce capital gains in the future. As for our liabilities in equity at September 30, we had $88 million in borrowings outstanding on our new three-year $185 million credit facility, $40 million in term preferred stock, $8 million in other liabilities, and $225 million in common stock. As reported last quarter, we amended our credit facility which allowed us to extend the maturity date of our line of credit to June 2017, or almost three years out. If it's not renewed or extended by that maturity date, all principal and interest will be due and payable on or before June 2019 or five years out. In addition, there are two one-year additions [indiscernible] to be agreed upon by all parties which, if exercised, could in effect push the facility out seven years. We were also able to reduce the interest rate from LIBOR plus 375 to LIBOR plus 325. Our net asset value per share was $8.49, and that is down to $0.08 from June 30, 2014. Moving over to the income statement, at September quarter end, total investment income was $9.1 million versus $9.8 million in the prior quarter. Total expenses, including credit, were $4.9 million versus $5 million in the prior quarter, leaving net investment income, which is before appreciation, depreciation, gains, and losses, of $4.2 million versus $4.9 million for the prior quarter, which is a decrease of 13.5%. The decrease in our investment income was due to a decrease in the other income of $0.9 million, which probably resulted from $1.3 million in dividend income from one of our portfolio companies, Mathey Investment, Inc., which is included in our prior quarter results. Over the last two quarters, other income has accounted for 5.5% and 14.6%, respectively of our total investment income and remains a focus for this fund. Our net expenses decreased slightly by $0.1 million or 2.2% percent quarter over quarter due to a variety of factors including a decrease in [indiscernible] and increases in other expenses in credit to fees. In total, our net investment income, which was $0.16 per common share, is a $0.02 decrease when compared to the prior quarter. Our debt investments drive our current income, and we believe they have favorable attributes in the market today, and are well positioned for the future. Almost 83% of our loans have variable rates, but they all have a minimum floor in the rate charge and the remaining 17% are fixed. With the average yield on interest-bearing debt investments remain flat quarter over quarter at 12.6%. While we believe 12.6% is a great yield, we often have success fees as component of our debt investments, but they are excluded from our reported yields. Success fees, as a reminder, are contractually due upon a sale of a portfolio company, although the portfolio company can pay it earlier. For comparison purposes, if we had accrued the success fees as we would pick our weighted average yield on interest-bearing assets would approximate 15.5% during the September quarter. Also from a credit borrowing standpoint, 72% of our loans are senior and priority, with the remaining 28% being senior subordinate and the capital structure of our respective portfolio companies. So, overall, we believe we are well positioned for the future, and with the income we were able to generate, we were able to increase our distribution rate on our common stock by 20% last year. So even though this quarter's net investment income of $0.16 per common share is below our distribution run rate of $0.18 per common share, we remain confident that our earnings run rate will increase and that investment income will cover our regular distributions for the fiscal year ending March 31, 2015, as we have done over our last four fiscal years. In fact, due to a buildup of excess earnings from prior years, our Board declared a $0.05 one-time special distribution for December, which represents the third calendar year in a row that we have had – that we have paid a one-time special distribution. Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation come from our requirement to market our investments to fair value on our balance sheet with the change in fair value from one period to the next recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event. During the three-month ended September 30, 2014, we recorded $12,000 of reliable losses due to a post-closing adjustment on the Venue sale in last year. During the prior quarter, we did not record any realized gains or losses. As for our unrealized activity during the quarter, the changes in our net unrealized depreciation of $1.5 million for the three months ended September 30, 2014, were primarily due to reduced equity and debt valuations in certain of our portfolio companies, partially offset by increased equity valuations in others. During the prior quarter, the net unrealized appreciation of our entire portfolio was approximately $5.9 million. Given our long-term view related to our investments, we have been pleased with the realized values for which we have exited our investments and are generally less concerned about the inherent quarter to quarter fluctuations in our valuations. For the September quarter end, our entire portfolio was fair valued at 84.2% of cost, which is up from 83.5% of cost last quarter. So, let's turn to net increase and net assets from operations. The term is a combination of the net investment income, the unrealized net appreciation or depreciation and realized gains and losses. It's basically all our numbers together. And for the September 2014 quarter end, this number was an increase of $2.7 million or $0.10 per share versus an increase of $10.8 million or $0.41 per share in the June quarter. The quarter-over-quarter change is primarily due to the aforementioned unrealized amounts over the two quarters. All of our portfolio companies are current in payment except for one, which continues to remain on nonaccrual and only represents a 0% of the fair value of our portfolio and 4% of the cost basis of our total debt investments as of September 30, 2014. And now, I'll turn the program over to Mr. Gladstone.

[David Gladstone:]

All right. Thank you. I've got good report from Michael and David Dullum and now David Watson and I think second quarter was a bit mixed from my perspective. We have had some great accomplishments, such as adding some new investments to our portfolio and increasing the line of credits so that we can leverage up a little bit more. We've always been very low on the leverage side. However, it was a little disappointing to have our earnings at $0.16 rather than the $0.18 that we had projected but, I believe, that will change as we move forward, simply because we closed two deals since then that should be in the earnings for the quarter ending December 31. Although, recent economic indicators have been really positive in many regards, the recovery still is sluggish, continue to monitor the economic outlook, which affects the investment climate in which we operate and feel we have a few concerns still today. We just don't know what the Federal Reserve is going to do with regard to monetary policies, and the impact on future interest rates. That's always a wild card. And the fiscal crisis in the Federal Government is still top of mind as the Federal deficit is now over $17 trillion and continues to climb as the government continues to spend. It just seems to be unsustainable and out of control. We don't know where that's going to lead us. And many of the private companies that we talk to, which we invest in, feel that too much regulations around healthcare, financial services, the energy sector, the emissions, all of these things are hindering the performance and expansion of the job growth marketplace that these companies could do if they were out from under so many regulations. Our company is strong positioned today to move forward and it has the strength in the balance sheet. We have good borrowing capacity. And I think a large equity interest in so many of these companies is just an insurance that, over time, they'll have plenty of earnings. We have excess earnings that we have on our balance sheet we could roll forward and can use to pay distributions. We have equity interest in companies that could be sold to do that kind of thing. So I think this company is in a much stronger position than some of the other business development companies we see. And despite the current economic issues, our firm has continued to make consistently monthly distributions. In October, our Board of Directors declared the monthly distribution of $0.06 per common share, and I think probably a surprise to some of you, we declared an extra one-time special distribution in December of $0.05 without increasing the dividend. We just always have to make that determination, and you'll see us go through it again in April, as we try to figure out what we think is going to happen for the year ending March 16, 2016. So we'll go through that agony again of trying to increase the dividend and not get ourselves in a position that we would ever have to cut the dividend. Through the date of this call, we've made 111 sequential monthly cash distributions to our common stockholders, and some bonus extra distributions, three in a row now. It does put pressure on us to look at increasing the dividend. At the current distribution rate on the common stock, which is trading at about $7.29, yesterday's close, the yield on the distribution is now 19.8%. And if you add in the $0.05 extra, people who bought it $7.29 with the 10.5%, which is unbelievable, if you think about the strength of this company, this is really high compared to the average yields during the last three calendar years of approximately 8%. I'm hopeful we can increase the dividend and get people back in line of buying these shares and moving forward. Distribution on our preferred stock, that's 7.125%, translates into a little over $0.14, almost $0.15 monthly or $1.78 annually. The preferred stock is closed at about $26, and on the NASDAQ under the symbol GAINT, which gives it a yield of about 6.8%. So, two good stocks to buy with this solid outlook for both of them. Our management team has a successful track record of investing in middle market businesses and has worked closely through the economic downturn. I now believe that Gladstone Investment is a very attractive investment for investors seeking continuous monthly distributions with a potential for special distributions or an increase in the dividend. We will continue to be disciplined in our investment approach and focus on the market making conservative investments in American businesses. We are all over the United States now. And so I feel very comfortable out there. But why don't I stop now and Stephanie, if you'll come on and let's have some questions from the analysts and our shareholders.

[Operator:]

[Operator Instructions] And our first question comes from Vernon Plack of BB&T Capital Markets. Your line is open.

[Vernon Plack:]

Good morning and congratulations on your last two deals, Cambridge and Old World Christmas. A question regarding those. Can you tell me what the ownership split is on Cambridge between Boston Harbor and perhaps management or anyone else?

[David Dullum:]

Sure, Vernon. This is Dave Dullum.

[Vernon Plack:]

Hi, Dave.

[David Dullum:]

Hi. Basically we have roughly, on a fully diluted basis, about 85% of the company, and the balance is between Boston Harbor and management, with one caveat and recognizing that why do a deal with someone like Boston Harbor, who is an independent sponsor? They generally are not going to get their ownership until some hurdle rate is achieved. So I'm sort of giving you numbers that would look down the road, assuming that occurred and that's where they would end up.

[Vernon Plack:]

So, it's listed an affiliate investment, though. Do you have 85% ownership of Cambridge? And if that were the case, wouldn't that be a control investment?

[David Dullum:]

David Watson, you want to tackle that?

[David Watson:]

Sure, Vernon. So the classification of our investments on the SOI's [for the act], is based off of voting securities.

[Vernon Plack:]

Okay.

[David Watson:]

And so we actually do not have greater than 50% of the voting securities in this investment or in either of these investments.

[Vernon Plack:]

Okay. Yes.

[David Watson:]

Economically, we tend to have more as Mr. Dullum just alluded to, but it's really a gap…

[Vernon Plack:]

Okay.

[David Watson:]

[For the act] voting security type of requirement.

[Vernon Plack:]

Okay. And can you…

[David Dullum:]

So, Vernon, just to be clear, too, we obviously, as you know, we are – they are quite active in the way in which we manage our portfolio companies from a governor's perspective, bringing independent directors on that can really add value to the companies, so while we, as David Watson said, do not have voting – certainly do not have voting control, we have quality activity around the, again, the management of the company and so on. We're not just sitting on the sidelines and, you know, receiving reports. That's an important thing for you to know as well.

[Vernon Plack:]

Sure. Well, thank you. And what was the multiple that the company was valued at?

[David Dullum:]

I don't want to disclose that directly, but order of magnitude a little bit over 6X.

[Vernon Plack:]

Okay. Yes. That's great. And for Old World in terms of ownership, would that also be listed as affiliate investment due to voting – I don't know how much you effectively own evaluation the management team and if there's anybody else involved.

[David Dullum:]

Right. To…

[David Gladstone:]

Vernon, that's correct.

[Vernon Plack:]

Okay.

[David Dullum:]

Yes. And in this case we actually had a new CEO came on Board and he actually put some capital himself into the deal, so he bought some shares, but roughly same general order of magnitude as the other one.

[Vernon Plack:]

Okay. And was the company valued sort of in that same range, somewhere in the perhaps the mid to high-single digits?

[David Dullum:]

Yes. I'd say that. Yes.

[Vernon Plack:]

Okay. All right. Thank you very much.

[David Dullum:]

Yes.

[David Gladstone:]

Next question, please.

[Operator:]

Thank you. Our next question comes from Mickey Schleien of Ladenburg. Your line is open.

[Mickey Schleien:]

Yes, good morning, everyone. I just wanted to touch on the overall performance of the portfolio. You know, there was a scare in the markets a couple of weeks ago that the economy would be slowing down, and notwithstanding the comments at the beginning of the call. I was curious how your company’s overall are performing in terms of their revenue growth and margins.

[David Gladstone:]

David Dullum, can you answer that?

[David Dullum:]

Yes, I'll answer that. Mickey, good morning. Pretty much across the board we're seeing stability. There are a couple for a variety of reasons and in some cases some of the newer investments that we have made. One of the things as you know we always look to as perhaps having to increase some expense for the right reasons, so that will impact sort of quarter to quarter the EBITDA. We've had a couple that are more attuned to certain industries, as an example, in the call it aerospace in this where we have seen a bit of slowing down. Some of that's timing as far as certain kinds of programs that are going on. So I would have to say net-net pretty neutral. I'm not seeing any big concern in any decline or from a slowdown in the economy that impacts any of the portfolio companies at this point.

[Mickey Schleien:]

Great.

[David Gladstone:]

And there's a couple of portfolio companies that are literally blowing the roof off in terms of growth, and I just can't believe – we never expected that much growth. So those are doing well today.

[Mickey Schleien:]

Good to hear. Perhaps for Dave Watson, I notice that you changed the footnotes to the SOI regarding valuation. Has there been any material change in your valuation methodology?

[Dave Watson:]

Mickey, there hasn't been any material change in our valuation methodology. We still continue to utilize third-party services of S&P to put a valuation on each and every debt security. We still continue to run the models running the TEV, the total enterprise valuations of each and every portfolio company, and so, in short, no, there hasn't been any material changes or frankly immaterial changes to our valuation process.

[Mickey Schleien:]

Okay. It's certainly nice to see the portfolio climb above 30 companies. It's great to see more diversification. And with valuation multiples as strong as they've been, I was hoping we'd see some NAV growth but you fully wrote off your Galaxy Tools preferred shares, and I was curious what's going on there. It was a fairly meaningful hit.

[David Gladstone:]

It was. Dave Dullum, did you want to talk a little bit more about Galaxy?

[David Dullum:]

I don't think so. I think when you say wrote off our preferred shares, that's probably to – they're in write-off the preferred shares, the value came down, we had a decline there. That was one I was sort of referring that's related to the aerospace industry. Actually, they are growing, if you will, they're in some major programs, some major expansions on their tooling capability side, so that timing thing, Mickey, and of course because of the – I'll call it the trailing both decline in EBITDA, still very positive, at a multiple, it's obviously had an effect on the valuation. But we did not write off our preferred shares there.

[Mickey Schleien:]

Well, what I mean by writing off is they're valued at zero relative to cost of $11.5 million, but I understand what you're saying. And again, talking about valuation multiples as strong as they are, you have some equity positions like the Cavert prefers and the Quench common shares and the channel tech shares, I was just curious, you know, whether we can expect you to rotate some of that into some yield assets to help grow NOI.

[David Dullum:]

Well, Cavert – the answer is no. We already did what you suggested on Cavert a few years ago. Actually, I think we've talked about this a little bit before. We sold our equity, common equity, back to the management as a very nice capital gain, which we realized, and then we actually helped to fund the purchase with debt, which did indeed add to the NII. The company's performed very well. It actually paid down on the debt. What we're basically left with is a relatively small preferred share, which is accruing a dividend. So that's one that is just going to run its natural course, very frankly, and ultimately we'll be taken out of that on the preferred stock. And let's see. What was the other one you asked about?

[Mickey Schleien:]

Quench and Channel Tech.

[David Dullum:]

Quench, we are – that one, we sold out our debt a few years ago. There's some very, very good equity guys that are running that, and the company's actually – perhaps something – some sort of liquidity event could happen there over the next year, a significant equity appreciation for us. So there's nothing we can really do in that particular case. It's not sort of a [seek] investment, if you will. So that's that one. And what was the last one, I'm sorry?

[Mickey Schleien:]

Channel tech.

[David Gladstone:]

Yes. Channel.

[David Dullum:]

Yes, again, channel, that's one we did with another private equity firm who really is their deal. We did that a few years ago. We did get taken out of our debt there. We are left with just some pretty much preferred equity, and we're not – at this point we have no reason to add to that [indiscernible]. Again, we're going to just let that one run its course.

[Mickey Schleien:]

Okay. And not to beat a dead horse, but I'm still trying to understand how Danco debt can be marked at 8% but still be on accrual. It would just seem that either it's severely undervalued or it should be on non-accrual. Maybe Dave Watson can reiterate how that can be.

[Dave Watson:]

Sure. Danco is a company that is – continues to pay current. The interest rates have, in a restructure last year, early this year, had been reduced to a more manageable cash flow type of situation. Danco has been seen an increase. Even though the valuation has come down, the Danco team has been refocused and has been restructured, new management has been put in place, and the company has seen an increase in their backlog. So ultimately we do believe that there will be a meaningful recovery in Danco but given the valuation methodology, the utilization of S&P, it does have a severe mark, but, again, they are paying current, and at this point, there are no guarantees it will remain on accrual. There is always a possibility if it doesn't continue to turn in the right direction that we might have to do that, but at this point, we felt that Danco should remain on accrual.

[Mickey Schleien:]

Okay. I appreciate that. Those are all my questions for this morning.

[David Gladstone:]

Okay. Do we have any other questions?

[Operator:]

I'm not showing any questions at this time.

[David Gladstone:]

Last chance until next quarter. I know other…

[Operator:]

[Operator Instructions]

[David Gladstone:]

Well, Stephanie, it sounds like we don't have any other questions, so we'll end this. Thank you all for tuning in and we'll see you again next quarter.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a good day.